Should We Invest in Unethical Companies?

I had a telephone conversation last week with a new client and one of the questions he had for me was, “Do you invest in unethical companies?” He was speaking about Wal-Mart (WMT) specifically, it turns out, but there are a lot of investors who avoid buying shares in companies with which they disapprove of their products, their way of doing business, or both. Common examples include stocks with ties to alcohol, tobacco, firearms, casinos, Mideast oil, etc. It was a good question and one that I don’t think I’ve addressed on this blog before, so I figured I would give my perspective.Before I get into an explanation, the answer to this question is yes, I will buy shares in the likes of Anheuser Busch (BUD), Altria (MO), Halliburton (HAL), Wal-Mart, and MGM Grand (MGM) if I think the stocks are good investments. This assumes of course that the client is okay with this. If a client does not want to own certain stocks, I have no problem following their request. The issue here, in most cases, is whether or not you want to support companies like this if you disagree (insert a stronger word here if you prefer) with what they stand for. Many people equate buying stock to supporting a company. The reality though, is that Wal-Mart does not benefit in any way if I were to buy 100 shares of their stock. That action simply results in one of their current investors transferring their shares to me, in return for cash. Wal-Mart does not benefit monetarily from that transaction. After an initial sale of common shares, the money changing hands is between individuals, so the company is out of the picture.I have no problem ceasing support for companies I don’t like. However, if I wanted to stop supporting Wal-Mart, for example, I would simply choose to never again set foot in one of their stores. No longer shopping there is adversely affecting their business. Not investing in their stock is not having the same effect. Since my job is to make money for clients, I will generally invest in the stocks that I feel can accomplish that goal, regardless of whether or not I like the underlying firms or not. This reasoning of course assumes that you are not buying shares in an IPO or a new offering of stock through which the firm is directly receiving the proceeds from the sale. In those cases, not buying the stock does have an impact on them, even though there will always be someone else willing to invest even if you’re not. Still, it’s the principle that is important.Full Disclosure: No positions in the companies mentioned at the time of writing, but not for the reasons discussed above 🙂

8 Thoughts on “Should We Invest in Unethical Companies?”

Buying shares in a company doesn’t directly benefit a company, but it does benefit it indirectly. Assuming WMT wants to access the equity markets (sell more shares), buying shares in WMT increases the share price and allows them to sell shares at that higher price. Obviously buying 100 shares won’t make much of a difference, but a whole lot of 100 shares will make a difference.

That assumes that WMT wants to tap the equity markets, which most large, established firms don’t need to do.

But yes, if a company will need additional financing in the future, and will look to issue more stock to do so, then buying the common shares could have an influence on the price they get per share.

Of course, if a company wants to raise $500M for instance, they really don’t care if they sell 25M shares at $20 each or 50M shares at $10 each. Regardless of what the stock price is, they are going to raise whatever amount they need to.

Maybe people relate it to buying a team jersey from an unaffiliated street vendor (i.e. the revenue goes to Joe Schmo Vendor). If I hate the Yankees, which I do, I’d never buy a Yankees t-shirt because my owning it suggests my support for them. If I were out on the street in the freezing cold, I can’t afford to be picky. I see SRI as people who can either afford to be picky (don’t want to show “team support”) or have a rooted, well-researched belief, that the traits of SR companies are in alignment with the companies that outperform the general market on a risk-adjusted basis?

RY, your argument seems different than Chad’s. I think Chad is saying that it’s OK to invest in any business, no matter how reprehensible because buying already existing shares doesn’t help the company. I’m not saying you should not invest in such companies, only that doing so does have some benefits for the underlying company. Aside from the ability to issue new equity, a lower stock price can put pressure on management to change its business practices.

I think what you are saying, RY, is that some investors can’t afford to pass up opportunities to invest in (what some might consider) unsavory companies. So, whether or not such an investment helps the underlying company, if the potential return is there, you have to invest in it.

How about exercising your right as a shareholder and vote your shares. Submit a shareholder resolution (or support someone else’s shareholder resolution) to get management to change behavior. Assuming it’s management behavior and not the product causing the problem. (e.g. cigarettes).

i think you’re all missing the point…people don’t want to invest in the stocks of companies they don’t believe in because they don’t want any part of their income/gains tainted or otherwise associated with the perceived immoral, etc. profits earned by those companies…its more likely a personal choice of where they want their income deriving from rather than a way to stick it to the companies

There is definitely an aspect of simple principles to a lot of people’s actions, as the last comment implied. I look at it from a quantitative perspective (likely due to my job) but many people wouldn’t even care if the firm benefits directly or not.

In the long run, stock prices will be correlated to earnings, not public opinion, so it might be tough to get shareholders to widely support calls for change when profits might not be helped by doing so. But I agree, shareholders should use their voting rights more often than they do. We’ve seen some movement on this in recent years, but vast improvement is still possible.

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